Blockchains – Increasingly important for businesses
In this guest article, Adi Ben-Ari, CEO of Applied Blockchain, discusses how blockchains are becoming increasingly important for businesses.
As we reach the end of another year, a look back at 2021 shows yet another set of milestones for blockchain technology. From the NFT boom kickstarted by Beeple’s landmark auction sale of THE FIRST 5000 DAYS for $69m, to the growth of decentralised finance (DeFi) to $170bn, the technology is entering wider consciousness at a blistering pace and is encompassing a much broader array of businesses.
This trend is set to continue, as worldwide spending on blockchains is set to triple by 2024, reaching a staggering $19bn. According to a survey, a large majority of businesses worldwide expect blockchain technology to provide a significant advantage to their operations. This charge is led by the financial services sector, where asset tokenisation and decentralised finance are set to dramatically shift business models and infrastructure.
But how did we get to this point? The recent viral interest in cryptocurrencies and blockchain solutions can make it seem as if they are nascent innovations merely riding a wave of hype. A closer look at the evolution of blockchains can illustrate more clearly that we find ourselves on a technological path leading to innumerable possibilities and a technological and financial revolution.
Setting the foundations
The early days of blockchain adoption saw the monopoly of Bitcoin and its numerous forks and variations. These revealed the wonders of the distributed ledger, but their usage and potential were primarily limited to payments.
In 2015 Ethereum was born, and with it came fully programmable smart contracts. These captured the imagination of many in the finance and technology industries. These smart contracts were originally designed to enforce rules regarding asset movement, but one of the real innovations of Ethereum was the ability to create custom tokens on its ecosystem and build applications using smart contracts.
The years leading up to 2018 saw a plethora of enterprises exploring blockchain technology and announcing initiatives, either alone or in industry consortia. These initiatives were almost exclusively focused on overlaying their existing business processes onto blockchain technology to reduce reconciliation with their counterparts and dependencies on intermediaries. These blockchain networks were typically closed (private), and small (an average network size of 1.5 nodes). While these use cases certainly held some value, in most cases a similar solution could be implemented without a blockchain.
The ICO boom
2017-2018 saw a cryptocurrency boom with the advent of the funding of projects through the issuance of new tokens (ICO). The vast majority of projects that were funded at the time were either scams or too ambitious to deliver on their marketing promises. However, a small number of projects that were funded in this manner provided some considerable innovations in technology, cryptography and financial models.
Throughout 2019, many of the enterprise experiments were not demonstrating the value that companies had expected given the hype and the constraints they imposed on them, while similarly, an incredible number of cryptocurrency projects had been funded and were not even close to delivering meaningful value. Meanwhile, the small number of cryptocurrency projects that were genuinely innovating and had been sufficiently funded quietly continued building.
The pandemic effect
In 2020, as the pandemic set in, more people found themselves at home, on their screens, with more time on their hands, and the interest in cryptocurrencies grew. By 2021, we witnessed the emergence of two rapidly growing phenomena: NFTs for digital art and collectibles, and decentralised finance (DeFi) for swaps and yield. Projects like Uniswap, MakerDAO for DeFi and OpenSea and NBA Topshots for NFT’s began processing and holding tens of billions of dollars in value.
Most of this innovation, activity and liquidity happened on the Ethereum blockchain. Yet with time, the cost of transacting on Ethereum increased considerably, and the throughput and time to confirm transactions slowed to the point where application developers and traders started looking for alternatives.
Two categories of alternatives were available: “Layer 2” solutions which attached themselves to Ethereum (such as Polygon, Optimism and Starkware), and other “Layer 1” blockchain networks such as Polkadot, Solana, Cardano, Flow and a host of others. Similarly, Ethereum 2.0 is currently in development with a controversial sharded architecture.
Solana, in particular, gained traction for NFT’s, and Polygon took much of the DeFi liquidity. One further Layer 1 blockchain network growing in popularity is Algorand. Boasting an impressive team of developers and building scalable, low-cost technology, Algorand’s mission to facilitate the trinity of scalability, security and decentralisation has attracted a number of investors and developers, including our own company, Applied Blockchain.
Stablecoins and CBDCs
In recent times, we have also seen the rise of stablecoins like Circle and USDC. It is looking likely that authorities will seek to regulate stablecoin issuers and their reserves, taking much of the risk out of the market. The emergence of regulated stablecoins will make it easier for businesses and enterprises to transact on these platforms and brings with it a significant value proposition.
Meanwhile, retail CBDCs (Central Bank Digital Currencies) will be issued by governments on their own infrastructure, as opposed to commercial stablecoins. It will be up to each government to decide on governance, issuance and collateral structures for its currency. It seems likely that in competitive democracies, governments will regulate stablecoins, and let the private sector determine the infrastructure, whereas more centralised states will likely dictate the technical rails.
Will NFT’s continue to rise? Will DeFi become more sophisticated? How will the regulators react? Will stablecoins mature and become more widely accepted or will central banks push their own infrastructures? These questions will be answered in the next few years, but as the evolution of blockchains has demonstrated, the industry will bring innovative solutions to many of our current issues.
Ultimately blockchains and smart contracts offer the most efficient transacting technology that is available today, and efficiency can only be held back so long. One thing is clear – businesses will ignore this space at their peril.